The raising of key rates by the Reserve Bank of India (RBI) is expected to ease the transition to the base rate mechanism, which came into effect from July 1.
The increase has ensured that short-term rates go up, thus ruling out any possibility of lending below the base rate, which is in the range of 7-8.25 per cent for most banks.
On Friday, the central bank hiked repo and reverse repo rates by 25 basis points (bps) each, to 5.5 per cent and four per cent, respectively.
“Any scope for sub-base lending is almost gone now, as the increase will push up short-term interest rates. If the repo rate is 5.5 per cent and one-year bulk deposit rates are already over seven per cent and expected to rise further, lending below 7.5-8 per cent is almost ruled out,” said the treasury head of a large state-run bank.
On Tuesday, Central Bank of India raised Rs 225 crore by issuing five-month certificates of deposit (CD) at 6.6 per cent. While one-year CDs were traded at 6.7-6.9 per cent, three-month CDs were dealt at 6.2-6.4 per cent, an increase of 10-25 basis points due to the interest rate increase by RBI on Friday.
Disciplined mobilisation
The introduction of base rate was aimed at and is expected to bring greater transparency in lending rates. As a corollary, another silent but significant change is taking place on liabilities. According to bankers, deposit mobilisation will become more disciplined and banks will be cautious before raising their deposit rates, especially for corporate bulk deposits.
In June, the sector experienced bulk deposits shooting up by more than 125 bps, as liquidity dried up due to 3G auction payments and advance tax outgo. Banks had been increasing their rates to keep their asset/liability profile in balance. Those rates, still at elevated levels, are expected to cool by the middle of this month, as liquidity is expected to return to the system as government spending begins.
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“The immediate rush for bulk deposits may not be there, as banks will look at those deposits on a more sustainable basis,” said a senior executive of Union Bank of India.
Any sudden change in costs will now have to be factored in the base rate. Changing the base rate frequently is something the banks may not want to do.
Short-term liabilities (deposits of less than a year) constitute the largest chunk in the books of the banks. According to RBI data of 2009, foreign banks have the highest dependence on short-term deposits, with 63.8 per cent of total deposits of less than one-year maturity, followed by new private banks at 53.1 per cent. Public sector banks have 45.7 per cent of their total deposits in this category.
“Bulk deposits are normally raised keeping in mind the price, deployment opportunity and liquidity requirement for asset liability management. Raising bulk deposits is specific to a situation. One would raise the bulk deposit which could be deployed with a positive contribution,” said M D Mallya, chairman and managing director of Bank of Baroda.
During the height of the global financial crisis in 2008-09, which resulted in a liquidity crunch, the government had to intervene to ensure banks did not offer exorbitant rates to mobilise deposits from the corporate sector. The Indian Banks Association made government banks agree to a ceiling of six per cent on all corporate bulk deposit rates.
At the end of 2008, banks started offering as much as 11 per cent for retail deposit rates. State Bank of India’s 1,000-day deposit scheme became hugely popular. However, the aggressive mobilisation pinched the bank’s bottom line and net interest margin, which came down to around 2.5 per cent from over 3 per cent.